TSP Loan to Pay Off Credit Card Debt | Good Idea? Military Money Manual Podcast Episode 98

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In this episode, Spencer and Jamie answer a listener question about using the Thrift Savings Plan (TSP) loan to pay off credit card debt.

Military Money Manual Podcast Episode #98 Links

Outline of Episode:

  • Is taking out a Thrift Savings Plan (TSP) loan to pay off credit card debt a good idea? 
  • Why you can’t compare annual return on your TSP to credit card interest rate
  • Steps to take to get control of debt
  • Helpful resources

Military Money Manual Podcast Episode #98 Transcript

[00:00:00] Spencer: This is basically the origin story, right? This is the Batman watching his parents get shot in Gotham City. Not that violent, hopefully. But I think it just shows that it's okay that you're in the situation, but you have to stop the bleeding. You have to… Take the steps, and the TSP loan is not the fix.

[00:00:42] Jamie: Hey listeners, today we're going to address a question we got from Instagram. Remember you can DM us on Instagram @militarymoneymanual  and ask us questions or send us an email at podcast@militarymoneymanual.com. 

This question says, “One of my sailors has 20,000 in credit card debt with a 25% APR. He was wondering if it would be a good idea to take out a TSP loan for that amount to get out of this vicious interest debt cycle. A TSP loan doesn't feel like something a person should rush into, but if he is getting a 10% annual return through his TSP versus paying 25 % interest, it seems like it might be worth it.

Spencer? Is this a good idea?

[00:01:21] Spencer: Oh, gosh, this is a terrible idea.

[00:01:24] Jamie: All right, tell us how you really feel. 

It's a good question, though, because on the surface, it looks like it would make sense mathematically.

[00:01:31] Spencer: Yeah first I want to address a misunderstanding here. You really can't compare the annual return in your TSP versus the interest you're paying on a consumer debt, like a credit card.

It's very much apples to orange. Like a 10% annual return in your TSP, Means that let's say that's year to date, which is actually not that great considering how good the C fund and S fund have done this year. But we'll leave that aside.

[00:01:53] Jamie: Maybe he's just talking to annual averages in general.

[00:01:55] Spencer: Yeah. Okay. Let's say that. Yeah. But that's great. That's a great return on your investments, but that's how much your investments are returning. Whereas you're paying 25% interest on a credit card. And those are two very different things

[00:02:11] Jamie: and the 10% is just this year or on average for one year.

If you take it out, then you're losing that 10% over the next 1, 5, 10 years. So it's really not just 10% once it could be 10% over the next 40 years.

[00:02:25] Spencer: Yeah. The power of compounding interest. You can look at a $20,000 investment in the S&P 500.

Would have done, let's say that this guy is in his twenties or thirties and let's put 20, 000 in the S&P 500 20 or 30 years ago. So there's this great website you can use portfoliovisualizer.com. You can just Google it. You don't have to learn how to spell visualizer, you can do these Monte Carlo simulations.

What a Monte Carlo simulation is basically is it lets you use Difference in it. It runs thousands, in this case, 10,000 different scenarios, and then it breaks them into the worst case scenario, kinda the middle case scenario. And then the best case scenario. So if you put $20,000 into the S&P 500 over a 20 year period, and the worst case scenario, it's going to over double to $50,000 and the 50th percentile.

So the middle case scenario, it's going to go to $145,000. Best case scenario is going to go to over $300,000. And that's over a 20 year period. If you crank that up to a 30 year period, you're going to see even crazier returns for that $20,000. So don't think of pulling $20,000 out of your TSP today as $20,000.

[Think about it in 20 or 30 years, when it's grown to potentially hundreds of thousands or even millions of dollars. Think about your future self and how annoyed you are going to be in the future when your past self has robbed you of the opportunity to have hundreds of thousands or potentially even millions of dollars in your retirement account. 

[00:04:03] Jamie: Okay, spencer. I want to get to the root cause of this But I think first there's some emergency action steps that I'm going to recommend. 

You got to cut up these credit cards. First of all, don't let the bleeding continue to flow. You got to stop the leak, cut up those cards and whatever habits or issues it could have been a medical emergency or something for the family.

We don't have the details on this situation, but make sure you're not going into more debt before you can even do anything else. 

Stop spending money.

[00:04:31] Spencer: Yeah, and easier said than done Jamie? I know I had student loan debts coming into the military, but one thing I was always very careful to avoid was credit card debt because I knew how insidious it is and I knew how much it could set me back financially.

But yeah as Air Force pilots, we have, we memorize these emergency procedures, right? We call them boldface. And in this case, I think you need to apply the boldface and you need to contain the emergency. 

Cut up the cards, stop using them, go to a cash based budgeting system, use a debit card, whatever it takes.

Don't cancel the cards, don't close the accounts. But you need to physically stop using them, take them out of your Google pay, your Apple pay, and remove them from your online, pause your Amazon Prime subscription, wherever it is, because $20,000 doesn't just sneak up on you, right?

I'm willing to bet, especially with credit cards, it's easy to go into auto loans, easy to get student loans. In those tens of thousands of dollars, but with credit cards, usually it's you're spending more than you make and when you do that, that slowly builds up and good on your sailor here for recognizing that there's a problem and getting ahead of it because $20,000.

It sounds like a lot of money, but in the grand scheme of things, if you are thinking about financial freedom, if you're thinking about financial independence, this is basically the origin story, right? This is Batman watching his parents get shot in Gotham city. Not that violent.

Hopefully this is the superhero origin story of the beginning of your journey to financial independence. Jamie, you started with six figures of debt. I started with six figures of debt. Thankfully for both of us, we weren't paying 25% interest rates.

[00:06:11] Jamie: We had some, we were on some of it.

[00:06:14] Spencer: Oh, did you? Okay. You had some credit cards. Yeah. But I think it just shows that it's okay that you're in the situation, but you have to stop the bleeding. You have to take the steps. Whatever got you into the situation, you need to start doing something else, or you're just going to end up right back in the situation.

And a TSP loan is not the fix. This is not the solution to your problems. You're the problems here, like in so many things in finances, it's not a numbers thing. It's a behavior thing. It's a psychological thing. It's a, it's an emotion, it's a feeling thing. And so we gotta figure out what's going on here.

And then we gotta come up with a plan. Like, how are we going to attack this debt? How are we going to get you back to zero without doing serious harm to your future self by taking out a TSP loan? The TSP loan, that's not even an option, really. You can just set that aside. Because, thankfully, this person came to you before it was $40,000 in credit card debt or $100, 000 in credit card debt.

And so I think this is an awesome opportunity to use the resources that you have in the military. Use the resources that you have on base. I just Googled Military One Source financial counseling. You can chat with them online to schedule a time to talk to them. You can, there's a 1-800 number you can call 24/7.

If you're overseas, they can set up a time to meet you in person, to do a video call, to do a phone call. There, the services that you have at your disposal as a military service member are. astronomically better than civilians. There is no free credit counseling service that you can turn to as a civilian that's actually going to help you and move the needle or they're trying to sell you some kind of debt consolidation service, right?

That just doesn't exist in the civilian world. But in the military, There are these resources there, and if you take advantage of them, they can really help. And if you're a leader, and you have a sailor, you have a marine, you have an airman, you have a soldier that comes to you and has these issues and wants to talk about it.

Reach out to those resources because they are there and they are set to help you out.

[00:08:16] Jamie: Yeah one of my favorite resources that I would direct you to is your base library as well as the financial counselors that Spencer mentioned your base library is going to have resources like The Total Money Makeover and the first thing I would do as a Supervisor if go buy The Total Money Makeover by Dave Ramsey for the sailor. 

Quick side note, by the way, good on you for being a supervisor where your sailor will come talk to you about this. That shows a lot about your leadership style. 

So okay, back to the regularly scheduled programming. The Total Money Makeover by Dave Ramsey is the program that's gotten literally millions of people out of debt. And that should be including me and Spencer. That should be the gift that you give them, whether it's from the base library or you actually go buy a copy of the book and give it to them, which is probably the better option.

Go get it. Give him the book. Maybe you even give a day pass to read it or something like that. Get them in that, get them on the podcast, the YouTubes, and hopefully they eat it up and they'll be all in and get that fire and the intensity to get this debt paid off.

[00:09:19] Spencer: Yeah, because like I was saying earlier, $20,000, it can seem like an insurmountable amount of money, but it is possible to pay that off, like hundreds of thousands, if not millions of people have proven that previously.

And a lot of them didn't have, first of all, a supervisor who's going to reach out and ask a question on a podcast for them. And that just shows that they're already starting in a better position than a lot of other people would with this issue. And one of the things, if you're the supervisor and this is your sailor coming to you and asking this question, there's a lot more information you need to gather here.

The TSP loan, again just throw that out. That's not an option. 

You need to know what are their monthly expenses? What is their monthly income? Do they have a spouse? Does the spouse work? Do they have other income sources like from another family member or something? Are they supporting someone else and so they have higher expenses?

Have them print out their LES and review it with them. Maybe there's state income tax on there that's being withheld. Incorrectly, because maybe they're stationed in a tax free state, income tax free state, and they want to set that as their tax domicile, and they want to stop paying taxes back to the home state that they have no connection to anymore.

So there's a lot of opportunities there. Where you can either find some extra money in there or maybe there's a deployment coming up and their name was on the list and you're like, you really need to take this deployment because A, that's going to increase your income, decrease your expenses and give you the opportunity to take a break from regular life and just.

Have that, like Dave Ramsey says, gazelle like intensity and get this debt paid off.

[00:12:15] Jamie: Okay if that's not quite cutting it and that doesn't work, are there other options for loans or balance transfers that are less painful in the long term than a TSP loan?

Where can we turn for other options?

[00:12:29] Spencer: Sure, so there are personal loans that you can look into. Depends again on your credit score, which actually, with $20,000 of credit card debt, as long as you're making the minimum payments on it, it depends on your utilization rate of your credit. But your credit might actually be pretty good because a credit score is a score that says, how good are you at borrowing money?

And it looks if you got $20,000 in credit card debt, you're pretty good at borrowing money.

[00:12:54] Jamie: Yeah. But you're probably going to be able to find a personal loan rate lower than 25%.

[00:12:59] Spencer: Absolutely right. And then you can consolidate your credit card debt into that personal loan and then start making payments to that personal loan.

Here's the trick though. You cannot, you must not continue to use the credit cards like you did previously. You still need to take the action steps of going to a cash based budgeting or a zero balance budgeting program. And there's so many out there. We've talked about a YNAB. You Need A Budget on the podcast before.

There's mint. com. It's free. It's ad supported. You can also pay a dollar and you don't get any ads. I do that. I think it's a much better service because I hate ads. Every dollar. Rocket money. You can even use a Google spreadsheet. There's plenty of resources out there where you can put in your income, list your expenses, and you might find opportunities where you can decrease your expenses, right?

Like you might have a hundred dollar a month cell phone bill and you realize, man, I can switch to mint mobile and pay $20 bucks a month. And there's $80 right there that I can put towards paying off my credit card debt. Look at the possibility of a personal loan to consolidate the debt. Another option might be a 0% balance transfer fee with 0% interest credit card.

Now, it might seem completely counterintuitive to open up another credit card when you're already in credit card debt, but a lot of these balance transfer cards offer you 0% interest if you move the balances to those cards, sometimes 12, 21, 24 months even. And that just gives you a little bit of breathing room, buys you a little bit of time, and allows your payments towards the debt to go that much further because you're not chipping away at the interest first.

But again, you have to have a solid plan. Where you are going to make payments towards this debt and you're going to pay it off. So don't, again, don't go back to using the credit cards. You have to go to that zero based or that cash based budgeting. And you have to have that plan where you're like, okay.

I'm going to make $500 a month payments towards this debt. Guess what? In less than four years, you'll have that debt completely paid off. Or maybe you have enough room in your budget and you can make $1,000 a month payments to that debt. And then you'll be debt free in less than two years. Or maybe you have a big bonus, reenlistment bonus coming up.

Or some other kind of, maybe you have a tax free deployment coming up and you're going to have additional income. Use that opportunity and crush this debt. You could get out of this debt. Again, we need more information here, right? We don't have all the pieces of the puzzle. We don't know the sailor's income.

We don't know their expenses. We don't know their life circumstances. But we do know that math is the math. You take $500 a month payments, 40 months, you'll pay off the $20, 000. 

[00:15:51] Jamie: I just want to reiterate that the personal loan debt consolidation or balance transfer is not going to solve the problem.

It just gives you a little bit of breathing space and gives you time to develop a plan. So stop the leak, stop the bleeding, get a better interest rate, give you some buffer, give you some breathing space. And then come up with a plan and then you'll be able to do it. You won't be able to just fix this overnight.

It's going to be a long term multi year process. But Spencer and I are living proof that with a plan and with a little bit of motivation, lots of people have overcome worse and we're on your side. I know that your sailor has a bright future ahead of them because they're even having this conversation and not just hiding under a blanket and pretending it's not a thing because it is and it's big.

But the fact that they're acknowledging it now means that the future is bright.

[00:16:41] Spencer: Again, like so many things in personal finance, if you just have a little bit of courage, the courage to just go and ask someone for help, or the courage to go to the library and check that book out, or the courage to tally up your net worth and be like, how am I doing?

Am I actually getting ahead? Especially on the officer side, sometimes people get to being a captain, get to being a major, an O-4 or an O-5. And they've been paid, over a 10 year, 12 year career, you could literally be paid over a million dollars in income. And how much do you have to show for that at the end of that 10 year, 12 year pay period?

[00:17:21] Jamie: Another thing I would ask the sailor to consider is where do you have money right now that you could throw at this problem other than the TSP? So let's say they have a $30,000 emergency fund, or they just PCS and they have a bunch of money saved up now that the PCS is settled, they don't need the emergency fund, then you consider using all that money in savings.

I'm not talking about selling a bunch of stocks or pulling money out of your Roth IRA or 401k. That's a little more extreme. But just what's in liquid savings accounts right now, maybe there's $1,000 or $5,000 or $10, 000 available to throw at this problem as well. So yeah. When you go through the baby steps, it'll talk you through that.

Dave Ramsey, The Total Money Makeover. It'll talk you through some of those options.

[00:18:03] Spencer: Yeah, those are some great points there. Jamie. You would think that someone who's $20,000 in credit card debt probably doesn't have an emergency fund and probably doesn't have additional savings set aside. But you'd be surprised.

People all the time surprise me where they're like, “Hey, I don't have a Roth IRA. I'm not putting any money in my TSP. But I have $50,000 in my checking account”, and you're like, okay, we need to talk about why aren't you investing in your future? Another thing that I think a lot of people, they can't wrap their heads around this, but TSP loans are not free.

It's not free money. You can't just take money out of your retirement account and not pay it back without paying penalties and fees and taxes on it. So you have to pay the loan back at an interest rate that's determined by the G fund rate the month before you take out the loan. So in this case right now, it's over 4%.

So that's definitely not free money. Now it's your money that you're paying back. But let's assume that it takes you a year to pay back or two years to pay back the $20,000 loan that you borrowed, the stock market could be up 30%, 40% in that time. And the only return that you're making is the 4% from your own money that you're putting back in there.

So you're not even making money really, you're just paying yourself back with your money that you're making. So it's a, the TSP loan is not a good deal. It's not, it shouldn't be. The first place that you consider to go to get money. If you are considering a TSP loan, I think you need to look at other factors like why am I considering this and what is going on with my finances that I'm in a position that I'm even considering this.

So to wrap it up, Jamie, I think it's a really great thing that the sailor came and talked to their leader, that their leader reached out to us and that they're thinking about this, right? I think that, unfortunately, I think that the kind of the route that they're looking at, the TSP loan, is not the right solution here.

But that's okay, right? That's just a tactics thing. Like the overall objective. They've already determined the overall objective, right? That you have an emergency here and you need to deal with it. You need to get rid of this $20,000 of credit card debt. 25 % interest is just, it's insane.

If you don't have any credit card debt, don't go into credit card debt. We talk a lot about credit cards on the podcast, on my website, in my Ultimate Military Credit Cards course, but it's all predicated on the fact that you can never ever go into any kind of credit card debt. And as soon as you do, you're probably going to negate all the benefits that we're talking about.

If that's even a remote risk for you, Don't do it. Don't sign up for my cards. Don't sign up for my course. Don't listen to any of the episodes we talk about. Don't sign up for an Amex Platinum card. Don't sign up for a Chase Sapphire Reserve if credit card debt is a risk. If you have a history of it, if you can't control yourself, if it just sneaks up on you because you can't keep track of it.

That's why we set up auto pay and everything, but if there's any kind of risk that you're even if you're not going to meet a welcome bonus, minimum spend, don't sign up for the card. It's not worth it. Wait, just wait. One day you'll make more money and it'll be worth it. 

So once again, Jamie, rule number one, spend less than you earn.

That's something that our friend Jeremy Schneider over at Personal Finance Club likes to talk about. So just remember if you're up there and you're listening to this and you're like, Hey, that's me. I've got $20,000 in credit card debt. We're cheering for you. We're on your team. If you need to, reach out at Military Money Manual on Instagram or podcast@militarymoneymanual.com. 

We love the reader and listener questions that we get, and we'll catch you in the next episode of the Military Money Manual podcast. [00:22:07] Jamie: The views and opinions presented here are those of the speakers and do not necessarily represent the views of the DoD or its components. Reference to any commercial products or services does not constitute DoD endorsement of those products or services.

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